# fm28 6 - are carried Q/2 is the average number of units...

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c. Write out the formula for the total costs of carrying and ordering inventory, and then use the formula to derive the EOQ model. Answer: Under the assumptions listed above, total inventory costs (TIC) can be expressed as follows: TIC = total carrying costs + total ordering costs = CP(Q/2) + F(S/Q) (1) Here, C = annual carrying cost as a percentage of inventory value. P = purchase price per unit. Q = number of units in each order. F = fixed costs per order. S = annual usage in units. Note that S/Q is the number of orders placed each year, and, if no safety stocks
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Unformatted text preview: are carried, Q/2 is the average number of units carried in inventory during the year. The economic (optimal) order quantity (EOQ) is that order quantity which minimizes total inventory costs. Thus, we have a standard optimization problem, and the solution is to take the first derivative of equation 1 with respect to quantity and set it equal to zero: Q ) S )( F ( 2 ) P )( C ( dQ ) TIC ( d 2 = − = . Mini Case: 28 - 6...
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